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The Failure of Populist Economic Policies

Iran and Venezuela share similarities. Both of these behemoths of the oil business enjoyed a decade of windfall oil revenues and both squandered it through the populist policies of their presidents, Mahmoud Ahmadinejad in Iran and Hugo Chavez in Venezuela.

While Venezuela has gone off the rails, Iran is crawling toward recovery. This is mainly because Ahmadinejad’s successor Hassan Rouhani broke off from past policies, though not all of them, while Nicholas Maduro kept Chavez’s course.

The effects of populist economic policies coupled with falling oil prices have been devastating on Venezuela. Maduro declared a 60-day state of emergency on Friday due to what he called plots from within the OPEC country and from the US to topple his leftist government, the Guardian reported.

Venezuela’s opposition, which scoffs at Maduro’s accusations of coups-mongering, quickly condemned the measure.

The Venezuelan president threatened the seizure of factories that have stopped production and the jailing of their owners on Sunday, BBC reported.

Opposition protesters have been rallying in Caracas to push for a recall vote to eject him from power.

Venezuela has the world’s largest oil reserves, but its economy has been severely hit by falling global oil prices. Its economy contracted by 5.7% last year and its official inflation rate is estimated to be topping 180%.

Iran, on the other hand, is emerging from two years of recession and has managed to curb inflation from over 45% to 11% this year.

“All the [wrong] policies that Iranians got to know in the past decade were amplified and carried out in Venezuela,” our sister publication Tejarat-e Farda weekly quoted Hossein Abbasi, an Iranian economist, as saying.

The drop in oil prices, however, brought their faults to light. While Iran chose to dampen the shock by controlling monetary policy, Venezuela’s government continues to pump money into its economy while resorting to a multiple exchange rate system.

Venezuela’s bolivar fell past 1,000 per US dollar in the black market, as the world’s fastest inflation erodes the value of the South American nation’s currency, Bloomberg reported.

This means that the country’s largest denomination note of 100 bolivars is now worth less than 10 US cents. The currency has declined to 1,096 bolivars per dollar, according to dolartoday.com, a website that tracks trading in street markets where Venezuelans go to skirt limits on foreign-exchange purchases.

The government maintains official rates of 6.3, 13.5 and about 200 bolivars per dollar for authorized purchases of items deemed essential.

Ahmadinejad also resorted to multiple exchange rates and printed money when the going got tough. Luckily for Iranians his term ended in 2013.

Rouhani changed direction but has yet to abandon the multiple exchange rate regime and cut subsidies.

The issue at the heart of this is not just ignorance.

“The increase and decrease of wrong policies is heavily dependent on the political structure that makes them. People who call the shots must be penalized for their mistakes,” said Abbasi.

More often than not, they get away scot free. As long as officials are not held accountable for their mismanagement, populism can ravage economies.

“These governments enact policies that force the public toward short-termism, which worsens the crisis,” said Abbasi, who believes another reason behind Iran’s better situation is its more diverse economy and less reliance on oil.